1. law, govt and politics
2. government

J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 24 (1), 83-113
SPRING 2012
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM
CHINA’S RECENT BUDGET REFORMS1
Jun Ma and Li Yu*
ABSTRACT. To modernize budgeting system is a challenge issue in many
developing countries. To some scholars (Schick, 1998a, 1998b; Ma,
2009a), developing countries must first put into place basic budgetary
controls before moving to more advanced models of budgeting. This
approach of “basic first,” however, is questioned by others (e.g., Andrew,
2006). Drawing on China’s recent budget reforms, this essay reconfirms the
validity of the “basics first” approach. In China, budget reform since 1999
has begun to install budgetary controls for state finance, leading to an
enhancement of budgeting capacity and financial accountability. However,
governments at the same time have begun to be plagued by the unexpected
problem of delays in spending and the accumulation of significant
underexpenditures. Contrary to what many people may believe, we contend
that this somewhat odd problem arises not because the new budgeting
system has exercised too much control but rather because the new system
is not yet effective in exerting budgetary controls.
INTRODUCTION
This essay addresses a somewhat odd problem occurring in
China’s budgeting execution since the 1999 budget reform. Before
1999, government finance in China had been carried out without
effective budgetary controls. In 1999, a budget reform was initiated,
which established budgetary controls both within and over the
government. For more than ten years, these controls have led to an
----------------* Jun Ma, Ph. D., is a Professor, Research Center for Chinese Public
Administration and School of Government, Sun Yat-sen University, P. R.
China. His research interests are in public budgeting. Li Yu, Ph.D., is an
Assistant Professor of the School of Public Management, Southern China
Normal University. Her research interests are in public budgeting.
Copyright © 2012 by PrAcademics Press
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enhancement of financial accountability and budgeting capacity in
China. Meanwhile--and very unexpectedly--governments at all levels
and nationwide have been plagued by the problem of spending
delays and the accumulation of significant under-expenditures. This
indicates not only low operational efficiency in financial management
but also ineffective policy implementation, and has greatly limited the
state’s ability to achieve its goals (Ma, 2009a).
Why is it so difficult to spend money as budgeted? Is it because
the new budgeting system has exercised too much control? Should
China pull back somewhat from its effort of imposing budgetary
controls in the public sector? These questions are crucial for the next
steps in China’s budget reforms. However, even in the Chinese
literature, little attention has been given to them. The authors of this
paper seek to fill this vacuum despite difficulties in data collection.
The difficulties arise mainly from the fact that even ten years after the
implementation of budget reform, budget information, especially
regarding actual expenditures, is not open to society. This study
therefore relies heavily on data collected during our fieldwork
conducted from 2003 to 2009. Our fieldwork was conducted in seven
provincial-level budgeting systems, including two in the rich coastal
region (Guangdong and Fujian), three in central China, where the
economy is middling (Hebei, Hubei, and Hunan), and two in the poor
western region (Yunan and Gansu) as well as in four municipal
budgeting systems, including Taiyuan (the capital city of Shanxi
Province, located in central China), Guangzhou and Wuhan (capital
cities of Guangdong and Hubei provinces, respectively), and Xiamen
(in Fujian Province). In each place, we interviewed financial officials
from the finance department as well as several departments (e.g. the
planning commission) also holding budgeting authority, different
functional departments, the audit department, and the budget
supervision office of the legislature. In each place, we interviewed
about16 respondents, and each interview lasted roughly fifty
minutes. To enhance our understanding of the issues addressed, we
also collected and analyzed available documents issued by finance
departments, audit offices, and the legislatures at all levels, along
with information disclosed in official news reports.
We expect that this study will provide some lessons useful for
other developing and transitional countries which have been
struggling to modernize their budgeting systems. In his oft-cited
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
85
essay, Schick (1998a) contended that before moving to more
advanced models of budgeting, developing countries should first put
into place basic budgetary controls in order to implant formality into
the governing process. To Schick (1998b), although budgetary
controls may reduce efficiency, “the cost is justified when the rule of
law is implanted in the public administration” (p. 122). In 2006,
Andrews questioned this “basics-first” approach. First, while budget
basics may be important, they are not necessarily a prerequisite for a
performance-based budgeting reform. Second, budget basics may
impede the progression of performance-based budgeting reforms.
This is especially true when budgetary controls are unfair and
unrealistic. Third, Andrews (2006) contended, factors other than
budget basics have affected the progression toward performancebased budgeting. Recently, drawing on Chinese budget reforms, Ma
(2009a) endorsed the basics-first approach. He contended that at
least in the case of China, it is upon the establishment of basic
budgetary controls that China has begun to develop the basic
capacity to budget.
Is the stage of building budget basics as critical as Schick
(1998a, 1998b) and Ma (2009a) assert? The examination of the
occurrence of underexpenditures in China’s budget execution will
help to enhance our understanding of this issue. Usually, one of the
biggest problems in budget execution in transitional and developing
countries is overspending and the accumulation of budget arrears
(Martinez-Vazquez & Boex, 2000; Schiavo-Campo & Tommasi, 1999,
chap. 7). It is true that in a number of developing countries,
underspending is a very old problem, usually coexisting with offbudget spending and even occurring in investment expenditures
which are on-budget (Schiavo-Campo & Tommasi, 1999, chap. 6). But
in China, underexpenditure occurs in almost all programs, and the
amounts of it are larger. It is quite easy for observers to attribute the
occurrence of underexpenditures to the establishment of budgetary
controls since the reform. However, we argue that the occurrence of
underexpenditures in China has not resulted from the establishment
of budgetary controls since the reform; it instead is attributed to the
fact that the establishment of these controls has been incomplete.
In the remainder of this paper, we first describe China’s 1999
budget reform, a necessary prerequisite for understanding China’s
current circumstances. We then describe the delays in spending and
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the accumulation of unspent monies that have occurred since the
implementation of the budget reform, and this is followed by an
examination of the problems associated with the occurrence of
underexpenditures. Then, we explore possible causes of
underexpenditures. Our conclusion and discussion are presented in
the last section.
THE 1999 BUDGET REFORM
From 1949 to 1978, state finance in China was plan oriented:
resources were allocated according to a plan, and the budget was
merely a tool of plan implementation. From the onset of economic
reform in 1978, the planned economy, and hence the plan-oriented
state finance system, disintegrated. However, until the 1999 budget
reform, there was no effective budget system to fill the vacuum.
Consequently, state finance during the period from 1978 to 1999
resembled what Caiden (1989) calls prebudgeting (see in Ma,
2009a, 2009b; Ma & Ni, 2008).
On the one hand, state finance was fragmented and
decentralized, and consequently lacked effective administrative
controls within the government. The fragmentation of budgeting
authority within the government is evident in three aspects. First, in
addition to the finance department’s serving as the central budget
agency (CBA), there existed quasi-central budget agencies (quasiCBAs), e.g., the planning commission (now renamed the Commission
of Development and Reform), which held allocative authority over
certain fiscal resources. Second, from the 1980s onward, there was a
rapid expansion in off-budgetary finance, wherein every department
extracted and then spent off-budgetary funds with no supervision.
Third, because of the lack of departmental budgets, the finance
department tended to allocate budgetary funds in a lump sum to
each department which then held so-called secondary budgetary
authority to decide where to spend these monies. Meanwhile,
financial management was overly decentralized. There was no single
treasury account; public monies were dispersed to a variety of
accounts that were opened and tightly controlled by various
government units which would happily spend monies with no outside
supervision (Ma, 2009a, 2009b; Ma & Ni, 2008).
On the other hand, for many years state finance in China tended
to maximize executive discretion at the expense of legislative
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
87
oversight. While the government at each level would annually submit
its budget to the legislature (the People’s Congress) for review and
approval, the budget contained only budgetary revenues and
expenditures and was always compiled in aggregate totals, with little
information about specific activities or details of objectives of
expenditure. Therefore, the People’s Congress merely acted as a
rubber stamp in the budgetary process (Ma, 2009a, 2009b; Ma & Ni,
2008).
In 1999, China initiated a budget reform which included three
major parts: departmental budget reform (DBR), treasury
management reform (TMR), and government procurement reform
(GPR). The DBR requires that governmental budgets be compiled on a
departmental basis. In order to compile departmental budgets,
standardized budgetary formats and procedures were enforced. The
principle of comprehensiveness, which requires departments to
include all of their revenues and expenditures in their budgets, was
strictly enforced. Detailed expenditure objectives were adopted in
order to present detailed information about planned activities and
relevant costs. This served to remove much of the secondary
budgetary power that departments had previously enjoyed. In order to
reduce arbitrary decisionmaking in resource allocation, new methods
of budgeting were adopted: while basic expenditures (personnel and
operation expenditures) are budgeted according to a system of fixedquota management (dinge guanli), a modified version of zero-based
budgeting was adopted for program expenditures designed for
achieving certain policy goals. The TMR was aimed to create a
centralized treasury management system to replace the old,
decentralized system. A single treasury account system was created.
Upon which, a new system of fiscal direct disbursement (FDD) was
installed to centralize fiscal disbursements. The GPR was designed to
create a centralized procurement system to replace the previous
decentralized system. It has centralized in the finance department
those procurement activities that were formerly dispersed throughout
various bureaus. Open and competitive bidding was emphasized. FDD
was adopted for the disbursement for many government
procurements, especially large project procurements that in the past
were often plagued by corruption scandals (Ma, 2009a, 2000b; Ma &
Ni, 2008).
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Facilitated by the DBR, legislatures began to exercise the power
of the purse at all levels. Governmental budgets are now submitted
earlier to the legislature for review, and, more importantly, as budgets
are more comprehensive and broken down to departmental-level
details, the legislature can substantially review governmental
budgets. Consequently, legislatures have gradually, and for the first
time, gained real supervisory power over the government budget and
are beginning to place checks and balances on the government’s
budgetary decisionmaking (Ma, 2009a, 2009b; Ma & Ni, 2008).
The goal of the reform is to create a modern public budgeting
system in China, complete with the establishment of budgetary
controls both within and over the government. The reform has begun
to transform the finance department into a CBA capable of exerting
uniform budgetary controls within the government. The DBR
centralizes budget authority during budget compilation, while the
other two reforms have begun to install ex ante outside controls in
budget execution. Meanwhile, facilitated by the DBR, the legislature
has begun to play a substantial supervisory role in the budgetary
process. The two types of budgetary control have not, however, been
equally emphasized in the reform. At present, achievements have
been made mainly in the dimension of budgetary controls within the
government; with regard to legislative controls, many challenges lie
ahead (Ma, 2009a, 2009b; Ma & Ni, 2008).
THE OCCURRENCE OF UNDEREXPENDITURES
The establishment of budgetary controls has led to a
centralization of spending authority, to increased transparency, and
to a tightening of expenditure controls, all of which in turn have
enhanced budgeting capacity and financial accountability in China
(Ma, 2009a, 2009b). For instance, fund diversions, a persistent
problem under the previous system, have decreased since the reform
(Ma & Ni, 2008). One would therefore expect that budget
implementation would be more effective than before. Unfortunately,
since the reform, a new and somewhat odd problem has beset
China’s budget execution: money cannot be spent as expected or
budgeted. At the end of each fiscal year (from January 1 to December
31), a large amount of budgetary funds have not been spent as
budgeted, and most of them must be carried over to the next year
and even the year after that.
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
89
These delays in spending and the amassing of a large amount of
unspent monies occurred shortly after the implementation of budget
reform. By the end of 2001, when the new treasury management
system was launched in six pilot central budgetary units, all of them
except the Chinese Science Academy had accumulated unused funds
(Table 1).
TABLE 1
Unused Funds in Six Central Government Units, 2001
(in ￥100 Million)
Appropriat
ed Funds
Ministry of Water Resources
Ministry of Science & Technology
Ministry of Finance
Legal System Office
Chinese Science Academy
National Natural Science Fund
Total
Paid
Funds
Unused
Funds
10048.83 5752.44 4296.39
5869.25 4561.69 1307.56
211.77
207.66
4.11
7.61
6.01
1.6
750
750
0
282.6
100.89 181.71
17170.06 11378.69 5791.37
Unused
Rate (%)
42.76
22.28
1.94
21.02
0.00
64.30
33.73
Source: Zhang, Lin, Lou, Xu & Li (2002).
This accumulation of unused funds continued to take place and
became a salient problem nationwide in subsequent years’ budget
execution. Between 2002 and 2006, the spending of budgeted funds
at the central level was generally slow in the first half or the first
three-quarters of each fiscal year. The highest rate of spending
usually occurred in the fourth quarter (see Figure 1). Usually, on the
last day of the second quarter, only 41% of budgeted expenditures
had been carried out (Zhu, 2007). The year 2009 saw no
improvement: at the central level, from January to the end of
November, only ￥5623.6 billion of a ￥7623.5 billion total budget
had been spent; the expenditure rate was 73.8%. In other words, the
government was faced with rushing to spend the remaining ￥2000
billion in the last month (Xinhua Net, 2009).
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FIGURE 1
Average Percentage of Expenditure Executed Quarterly
Against the Budget Approved between 2002 and 2006
39.5
Fourth Quarter
23.5
Third Quarter
24.1
Second Quarter
17.1
First Quarter
0
5
10
15
20
25
30
35
40
45
Source: Zhu (2007).
The situation is similar at the provincial level. During the years
since the implementation of the reform, underexpenditures have
been repeatedly singled out for criticism in almost all provincial-level
governments’ budget execution reports, actual expenditure reports,
and auditing reports, and reviewing reports of standing committees of
provincial legislatures.
It is a problem for both rich and poor provinces. For example, in
Jiangsu, one of the richest provinces in China, the expenditure rate of
budgeted funds for the first three quarters of 2005 was only 36.3%
(Zhu, 2006). In Shanxi, a province with a mid-level economy and
finances, the average budgetary expenditure rate from 2000 to 2004
was only 39.84% during the first six months of each year (Zheng,
2004). In the western province of Sichuan, at the end of June 2006,
only 36.3% of the year’s budgeted funds had been disbursed (Chen,
2007). Most surprisingly, underexpenditure was also a problem even
in the poorest, most money-hungry provinces. For example, the
impoverished northwestern province of Gansu has been troubled by
spending delays and the accumulation of unspent monies for years.
At the end of August 2006, less than 50% of budgeted funds had
been spent, and the expenditure rate for the ￥6.8 billion budget was
just above 45%, reduced by 5.15% from the same period in 2005
(Zhou, 2006).
Underexpenditures are both good and bad news. They are good
news because they mean that the budgetary controls created by the
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
91
reform have helped curb misallocation, embezzlement, diversion, and
other forms of fiscal malfeasance persistent in the older system. Prior
to the reform, agencies could easily spend every penny on hand
without any difficulty. But the steady institutionalization of budgetary
controls has made it harder to misuse and squander funds. For
example, the creation of the single treasury system and the adoption
of a centralized disbursement system have significantly enhanced
finance departments’ ability to monitor fund flows (Ma & Ni, 2008;
Yang, 2004, pp. 245, 285). In the 2002 and 2003 fiscal years,
facilitated by the new centralized treasury system, the treasury
division of the Ministry of Finance (MOF) detected and prevented
malfeasance in using and disbursing funds in 61 central-function
units and 427 budgetary units, saving ￥2.96 billion in public funds
(Wang, Wang & Zhe, 2004). In 2004, 40% (￥6.9 billion) of the ￥
17.3 billion surplus was generated by the adoption of the centralized
disbursement system. The centralized procurement system also
contributed substantial savings (MOF, 2006, pp. 140–41). Most
importantly, unspent monies are now retained in the coffer of the
treasury’s single account and cannot be squandered by agencies.
However, underexpenditures are bad news when they are linked
to low operational efficiency and ineffective policy implementation.
The delay in spending early in the fiscal year has always been
followed by a rush to spend at the end, usually associated with waste.
Both at the central and local levels, during the years since the budget
reform, the rates of expenditure were highest in the last month of the
fiscal year. From 2002 to 2006, at the central level, on average
24.2% of the year’s budgetary expenditures were made in December,
compared with an average of only 17.1% for the preceding quarter
(Zhu, 2007). The situation at the local level was no better. For
example, in Jiangsu Province in 2005, 38.9% of the whole year’s
budgetary expenditures were made in December (Zhu, 2006). In
Anhui Province, of ￥29.42 billion actual expenditures made in 2007,
24. 5% (￥7.19 billion) were made in December (Liu, 2008).
Even worse, most of these monies were actually not spent but
were simply recorded as disbursed in accounts, resulting in an
increasing accumulation of unspent monies, most of which were
carried over from one year to the next. For example, according to the
2003 central audit report, at the end of 2002, unspent monies in
129 central budgetary units amounted to ￥64.603 billion. By the
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end of 2003, that amount had reached more than ￥58.938 billion
(Li, 2003). In 2006, unspent monies increased by 10% from the
previous year; in some central departments the increase was much
greater, and certain departments left 50% of their annual budgetary
appropriations unspent (Zhu, 2007).
Unspent monies can occur in both basic and program
expenditures, the two basic budgetary classifications in the new
Chinese budgetary system. Basic expenditures are budgeted for
public agencies’ personnel costs (e.g., wages and benefits) and
operation costs (e.g., facilities maintenance, vehicles), while program
expenditures are budgeted for the agencies’ specific policy goals.
Unspent monies have accumulated mainly in program budgets. In
2006, of the ￥57.4 billion unspent funds in the MOF’s treasury
centralized disbursement system, 93.6% were program expenditures
(Zhu, 2007).
In China, as in many other countries, unspent monies are
classified as fiscal surplus. In program budgets, there are four types
of fiscal surplus, which can be grouped into two categories (see Table
2).
TABLE 2
The Four Types of Fiscal Surplus
Subcategories
Institutional
Requirements
Net Surplus (a) Monies remaining after programs have Spending
been completely executed.
authority will be
surrendered to
(b) Unutilized monies resulting from
the finance
termination of certain programs due to
department for
policy changes or plan adjustments.
(c) Monies that have accumulated after two diversion to
fiscal years of no monies having been spent other uses.
for the planned program or money left after
the third year of program execution.
(d) Unspent monies occurring in programs Usually, after a
Specific
review process,
executed but unfinished or programs
Surplus of
carryover
whose implementation has been
Program
occurs.
Expenditures postponed to the following year.
Source: MOF (2006).
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
93
Using this classification, Table 3 presents the fiscal surpluses that
amassed in program expenditures at the central level from 2004 to
2007. Most of them are in nature a kind of inefficient surplus
associated with unfinished programs. In 2004, their percentage in
the total fiscal surplus of program expenditures was as high as
90.94%, and in 2007 it remained as high as 81.06%. Put differently,
these are not efficient surpluses -- savings generated as a result of
efficiency improvements after programs have been completely
implemented.
TABLE 3
Surpluses in Program Expenditures, 2004-2007(in ￥100 Million)
Number of Central Budgetary
Units with Surpluses
Total Surplus of Program
Expenditures
Total Net Surplus
Total Specific Surplus of
Program Expenditures (SSPE)
2004
12
2005
11
2006
17
2007
19
63.02
29.69
18.99
47.31
0.21
1.99
2.44
6.24
57.31
24.99
16.52
38.35
(90.94%) (84.17%) (86.99%) (81.06%)
Note: Percentages in parentheses are the share of the SSPE in the
total surplus of program expenditures.
Source: NAO (2005, 2006, 2006, 2008).
Problems with budget execution also mean that there has been a
failure in policy implementation. This is especially true when the
unspent funds are concentrated in program budgets designed to
achieve specific policy goals. Even more regrettable is the fact that
they tend to amass mainly in the budgets of programs designed to
improve the quality of life of the citizenry, programs which are
desperately needed. For instance, from January to August 2007, in
many such programs at the central level, less than 50% of funds
budgeted were spent: only 44.9% of the funds for health care were
spent, only 48.2% of funds for city and rural community affairs were
spent, and only 48.8% of funds for environment protection were
spent (Zhu, 2007). In Anhui Province, in 2007, only 74.8% of the
funds budgeted for education and 77.4% of the funds for health care
were spent, resulting in a large carryover of ￥7,200 million and ￥
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3,300 million, respectively (Liu, Z., 2008). This inefficiency in budget
execution has greatly impeded the state’s ability to achieve its policy
goals.
WHAT HAS CAUSEED THE PROBLEM?
A number of factors contribute to delays in spending and the
amassing of underexpenditures. Some are technical, such as
problematic accounting methods (MOF, 2006, p. 140), and hence are
easy to deal with. Unfortunately, most are associated with
institutional weaknesses in the newly created budgeting system, and
these are not easy to handle. It is mainly because of these
institutional weaknesses that underexpenditures occurred in China.
One form of institutional weakness is the still weak budgetary control
developed since the reform, and another is related to the low
“capacity to budget” whose improvement demands a refinement of
the newly developed budgetary controls rather than lessening these
controls.
Legislative Controls Remain Weak
Since the reform, legislatures have begun to exert the power of
the purse in the budgetary process. However, legislative controls are
still weak. As far as underexpenditures are concerned, respondents in
the fieldwork tended to note the following two factors which are
related to weak legislative control.
Mismatch between Fiscal and Budgetary Years
There has been a mismatch between the fiscal and budgetary
years. While the fiscal year runs from January 1 to December 31, the
budgetary year starts later; at the national level, it starts after the
legislature approves the budget in mid-March. Then, it will take at
least 15 days for the finance department to authorize the spending
authority to functional departments. This suggests that only after April
will departments start to execute the budget. But on December 31,
the spending of budgeted funds must cease as the fiscal year has
ended. Consequently, at the national level only eight or nine months
is left for budget execution, particularly for program budgets.
We found during fieldwork that generally, for basic expenditures,
departments are allowed to spend the amount in last year’s budget
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
95
before the legislature approves the new budget, but for program
expenditures, such a practice is seldom allowed. This explains why it
is program budgets rather than basic budgets that are beset by
underexpenditures. The execution of program budgets is further
delayed as their executions are required either to go through a
complex authorizing procedure or to follow the centralized
procurement system, or both, as is the case with infrastructure
expenditures. For example, in Guangzhou government, under the
current procedure, construction cannot start before August, even if
bureaus have successfully gone through the authorizing procedure. In
this case, only five months is available for carrying out infrastructure
construction (Su, 2006).
The mismatch between the fiscal and budgetary years is in fact
an issue related to legislative supervision. If it is accepted that only
after the legislature has passed the budget will the government be
legally able to spend money, the fiscal year should start from the date
the legislature passes the budget and end before the legislature
passes the next budget. Following this logic, one option for China
would be to have its fiscal year run from April 1 of one year to March
31 of the next year. Such a move would help to enshrine the power of
the purse and at the same time give the government three more
months to execute the budget.
Weak Legislative Control over the Use of Overcollected Revenues by
Government
The second factor contributing to the problem of
underexpenditures is weak legislative control over the government’s
use of overcollected revenues. Since 1994, each year the amount of
fiscal revenues actually collected has tended to surpass the amount
approved in the budget. As Table 4 shows, in most of the period after
the year 2000, overcollected revenues have constituted
approximately 9–10% of the total budget.
According to the 1994 Budget Law, as long as the budget is
balanced, any changes the government makes to the budget are not
considered budget adjustments and therefore do not need to be
submitted to the legislature for approval. As the use of overcollected
revenues will not result in deficit, such a change to the budget is not
a budget adjustment and hence does not need legislative approval. In
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TABLE 4
Overcollected Revenues, 1997–2007 (in 100 million￥)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Total
(All Levels)
244.06
170
568
1042
1611
899
1190
2785
2372
3307
7239
Percentage of the
Budget (%)
2.90
1.80
5.30
8.40
10.90
5.00
5.80
11.80
8.10
9.30
–
Total
(Central)
76.88
179.94
510
680
748
374
524
1262
1034
1960
4168
Percentage of
the Budget (%)
1.60
3.40
8.70
9.80
8.90
3.50
4.40
9.10
6.40
10.20
–
Source: Ma, Niu, Yue, & Lin (2008); Han, Du, & Wang (2008, March
7).
this context, legislatures at all levels cannot do anything to rein in the
governments in the use of overcollected revenues and the latter has
a great deal of discretion over the use of this money. Usually,
governments tend to use this money either for supplements or to
finance new programs because it is forbidden to use this kind of
money to compensate welfares of civil servants and operating
expenditures of bureaus. However, only in the last two months of the
fiscal year will the government be certain there are overcollected
revenues. Therefore, it is usually in the last two months of the fiscal
year, and even in the last month, that the government allocates
overcollected revenues to specific programs, despite the fact that it is
close to the end of the fiscal year. In this way, most of such money
allocated to programs of departments cannot be spent simply
because time available for program implementation is much limited.
To be worse, this money has become a tool the government uses
for circumventing legislative supervision. This is especially true in
places where the legislature is trying to strengthen its oversight over
the budget. In order to bypass legislative control, as we found during
fieldwork, the government will try to increase the size of this sort of
money which can be used, as noted earlier, without legislative
approval. One way to achieve this is to deliberately underestimate
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
97
budgetary revenues at the beginning of the budgetary year and then
collect revenues over the budgeted amount during budget execution.
The legislature is not blind to the problems associated with
overcollected revenues. To solve these problems, in 2006, the MOF,
under pressure from the National People’s Congress, began to
transfer a certain portion of the overcollected revenues into the newly
created Central Budget Stability and Adjustment Fund (CBSAF) which
can only be used in subsequent years. In 2008, the MOF further
formalized this system. Accordingly, under most circumstances
overcollected revenues must be surrendered to the CBSAF; without
the authorization of the legislature, governmental departments are no
longer allowed to directly use this revenue for supplements or new
programs during budget execution.
Despite these efforts, the use of this money at the end of the
fiscal year is still a dominant practice. At the central level, the
government continues to use this revenue without any ex ante
approval by the legislature although an ex post report must be
submitted to the legislature. As Table 5 shows, around 80% of this
revenue continues to be spent during the course of the fiscal year,
usually in the form of supplements.
TABLE 5
Overcollected Revenues Transferred into the CBSAF, 2006–2008
(in ￥100 Million)
2006
2007
2008
The Amount of Overcollected Total Revenues As a Percentage
Collected over
Revenues Transferred
of the Total
Budgeted Amount
to the CBSAF
500
2,573
19.43%
1,032
4,168
24.76%
192
1,082
17.74%
Source: MOF (2007, 2008, 2009).
In some localities, such as Fujian, Hebei, and Jiangxi, provincial
legislatures have begun to strengthen their supervision over this kind
of revenue. Usually, before a department can use this revenue, it
must receive legislative approval (Ma, Niu, Yue & Lin, 2008, pp. 186–
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MA & YU
187). But in many others, governments continue to have a great deal
of discretion over the use of this revenue.
Administrative Controls Remain Weak in Certain Areas
The budget reform has centralized much power into the finance
department, which consequently is moving toward becoming a CBA.
However, the centralization mainly applies to off-budgetary funds
previously held by various departments, and the finance department
is still far from being a real CBA, capable of implementing a uniform
budgetary control within the government (Ma, 2007; Ma & Yu, 2007).
The Remaining Fragmentation of Budgeting Authority
The newly developed budgeting system remains fragmented at all
levels, with quasi-central budget agencies (quasi-CBAs) continuing to
enjoy budget authority over certain monies. Usually, the finance
department turns certain monies over to these quasi-CBAs such as
the planing commission, which then allocates the monies to specific
programs. Although the new system requires all monies to be
allocated to specific spending objectives at the beginning of the
budgetary year, quasi-CBAs tend to allocate “their funds” any time
they please. Usually, a large proportion of these funds had not been
allocated to specific programs at the time the budget was submitted
to the legislature for approval, yet, even in the last month of the fiscal
year, quasi-CBAs allocated monies to specific programs. Because
budgetary funds left to these quasi-CBAs are substantial, the
fragmentation of budgeting authority by actions such as described
here has been one of the major causes of underexpenditure, as
pointed out by Zhu Zhigang (2007) when he was vice minister of
finance.
Reformers are not blind to the problems associated with this
fragmentation. In 1999, the MOF created a system for constraining
the budgeting power of these quasi-CBAs. Under the new system, at
the beginning of the budgetary year, the Commission of National
Development and Reform (CNDR), the largest quasi-CBAs at the
central level, is allowed to retain only 25% of the funds it controls as
reserve funds, and the other 75% must be allocated to specific
objectives of expenditure. Other quasi CBAs, such as the Ministry of
Science and Technology (MST), are allowed to retain in reserve only
3% of the total funds given to them. Since 1999, the MOF has
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
99
repeatedly emphasized that funds controlled by these quasi CBAs
must be allocated to specific objectives of expenditure as early as
possible (Ma, Niu, Yue & Lin, 2008, p. 156).
However, as repeatedly revealed by annual audit reports, this
system has failed to serve as an effective constraint. For example, as
Table 6 shows, the CNDR, which is responsible for the budget of
infrastructure investments, reserved more than half the funds it
controls during the period from 2003 to 2005. The CNDR retained in
reserve an amount two times higher than the permitted percentage of
25%.
TABLE 6
Investment Expenditures Being Allocated to Specific Objectives of
Expenditure at the Beginning of Budgetary Years, 2003–2005
(in 100 million ￥)
Total of budgetary investment expenditures
Total funds directly retained as discretionary
money
Total funds for programs waiting for feasibility
approval or programs involving many
subprograms
Total funds needing to be further allocated
Percentages of investment funds unallocated
to specific objectives of expenditure at the
beginning of the budget year
2003
304.49
76.13
2004 2005
304.5 354.4
74.8 87.03
54.96
40.3
0
56.9%
22.98
15.1
1.67
57.2% 68.5%
Note: Calculated from data disclosed by Li, J. H. (2003, 2004, 2005).
Other quasi CBAs, such as the MST, did exactly the same thing. In
2003 at the beginning of the budget year, the MST retained all of its
￥1.701 billion so-called Three Funds for Scientific and Technologic
Development (TFSTD) as reserve funds, and it was not until August
and even November that these monies were allocated in the form of
supplementary budgets to other departments and localities. This
consequently left only four months—and in some cases only one
month—for budget execution (Li, 2003). In March ,2004, of the total
of ￥7.6 billion TFSTD controlled by the MST, only 24% of it (￥1.8
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MA & YU
billion) was allocated to specific departments or programs, and as
much as ￥ 1.9 billion was appropriated after December 25 (Li,
2004).
From our investigation,local governments are no better than the
central government. For example, in 2006, it was found that the
Department of Transportation of Hainan’s provincial government had
retained 32.18% ( ￥ 282 million) of its ￥ 877 million program
expenditures as reserve funds, an amount higher than the permitted
percentage of reserve funds, which is 20% of the total program
expenditures (Lin, 2007).
Separation of the Budgetary and Policy Processes
The budget reform aimed to develop a budgetary system able to
control the decision making of public managers as well as politicians.
Certain achievements have been made, but mainly in normalizing the
behavior of departments and their managers. With regard to the
actions of politicians, the reform has yet to provide an effective
constraint (Ma, 2007).
The result has been a separation of the process of budgeting and
policymaking in China. First, after the budget has been approved by
the legislature, the government and standing committee of the
Chinese Communist Party initiate and make new policies, which the
finance department must allocate funds to implement. Second,
individual politicians initiate or make new policies during budget
execution. In many situations, the finance department must also
allocate funds for these new projects (Ma & Hou, 2005). In sum, as
several respondents pointed out in our fieldwork, while the finance
department appears to control the budget, in reality it cannot control
policies, and consequently it cannot really control the budget.
This split between budget and policy has created a number of
uncertainties in the process of budget execution. To deal with these
uncertainties, at the beginning of the budgetary year, finance
departments have to retain a certain proportion of funds as reserve
funds, to be used during budget execution to meet these unexpected
expenditure demands, usually in the form of budget supplements (Ma
& Hou, 2005). The inevitable consequence of this practice is that
many spending decisions are made during the already delayed
budget execution, exacerbating the problem of underexpenditure. For
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
101
example, in Anhui Province, in 2007, there were ￥3.19 billion worth
of budgetary supplements. This represented 10.84% of the province’s
total budgetary expenditures ( ￥ 29.42 billion) for the year (Liu,
2008).
Ineffective Controls over Unspent Funds
If the finance department were able to effectively control unspent
funds-for instance, by returning such funds to the fiscal coffer and
effectively constraining bureaus’ rush to spend at the last moment of
the fiscal year, then departments would be forced to improve their
operational efficiency in budget execution. Until this becomes the
case, department officials have little interest in improving how they
spend their budgetary funds because they know that unspent monies
can easily be carried over to next year.
Since 2005, the MOF has struggled to tighten its control over
unspent funds, especially net surpluses amassed in program
expenditures. It has implemented three measures: (a) Departments
are now required, in compiling their budgets, to include their previous
year’s net surpluses in their budgetary requests, and the MOF will
take those surpluses into consideration while making the new
budget; (b) During the course of the fiscal year, if a department
demands supplements or initiates new expenditures, last year’s
surpluses will be the first resource taken into consideration as a
source of financing; (c) Departments that have accumulated large
surpluses must reduce their budgetary requests in compiling their
new budgets (MOF, 2006, pp. 137–147).
However, in most situations, it is difficult for the finance
department to assert authority over the unspent monies. Annual
audits over the past several years have repeatedly found certain
unused funds were kept or hidden by departments. For example, the
audit of 2007 revealed that the CNDR had accumulated a ￥24
million surplus in two programs that were budgeted in the year 2000.
One program had been completed, and the other had been
terminated, but the CNDR had kept unused monies in its
transactional account for administrative expenses for seven years.
Similarly, by the end of 2006, the General Bureau of Broadcast and
Communication had accumulated a ￥12.84 million surplus across
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MA & YU
three programs, and none of these unspent funds had been rebudgeted into the following year’s budget (NAO, 2008).
The same problem exists at the local level. For example, in
Sichuan provincial government’s 2005 program budgets, the Office of
Poverty Alleviation accumulated a ￥ 547,000 surplus, the Law
Enforcement Bureau a ￥ 526,000 surplus, and the Industry and
Commerce Bureau a ￥ 400,000 surplus. In all cases, the
departments used the surpluses to compensate their operating
expenses without any supervision from the finance department
(Huang, 2006).
Certain provincial governments have adopted measures to
tighten the management of unspent funds. For example, in order to
increase the speed of spending while controlling waste, the Gansu
provincial government issued a notification in 2004. It required
departments still holding funds that had not been allocated to
specific programs or appropriated to specific units on December 20
to provide a formal justification for their delays in spending. Without
an acceptable explanation, unspent funds were to be surrendered to
the finance department and diverted to other uses (GOGSPG, 2004).
However, as admitted by Zhou Duoming, then the director of the
provincial finance department, the problem became worse in 2006
(Zhou, 2006).
Fragmented Budgeting Authority in Fiscal Transfers at the Central
Level
Since the 1994 fiscal reform, which centralized a large amount of
fiscal revenues to the central government, China has witnessed a
rapid increase in central fiscal transfers, most of which are in the
form of earmarked funds. From 1994 to 2007, earmarked fiscal
transfers from central level to localities increased from ￥36.1 billion
to ￥689.15 billion. In 2004, earmarked fiscal transfers accounted
for over 57% of all central fiscal transfers, and between 2005 and
2007, this share ranged from 48% to 49%.2
However, at the central level, budgeting authority over fiscal
transfers is very fragmented. Almost all ministries are able to grab
monies, ostensibly in the name of various transfer programs, from the
MOF. Usually, these funds are budgeted in aggregate total. This
therefore grants ministries a secondary budgeting authority to further
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
103
allocate these funds to various subprograms that have been
submitted by various subnational departments during the execution
of the central budget. The fragmentation therefore created a long
chain of applying, authorizing, and then appropriating fiscal transfers
from the center to localities. As the auditor general, Liu Jiayi (2008)
recently pointed out that fragmentation has been a major reason for
the delay in budget execution and the occurrence of
underexpenditures.
For instance, in 2007, 50 counties submitted 40,000 programs
for agricultural subsidies to relevant central ministries, well indicating
how fragmented the central budgeting authority is. And, 39% of which
took more than six months to go through the whole process from
submission to authorization, and 32% of which took more than six
months to go through the process from authorizing to appropriating.
Of these 50 counties, 45% received the promised money in the fourth
quarter, and even after the fiscal year ended, while￥0.45 billion still
had not been appropriated to localities. Consequently, 43% of the 50
counties didn’t finish their programs in 2007 (Liu, 2008).
Budgeting Capacity Remains Lower
China’s budgeting capacity has certainly improved since the
budget reform. However, the development of the capacity to budget is
a long and time-consuming learning process, and China’s overall
ability remains low (Ma, 2009a). This has contributed to the
accumulation of underexpenditures.
Low Capacity in Budget Compilation
In a system that is not subject to any controls, spending (usually
squandering) is the easiest thing to do. Once budgetary controls have
been put in place, spending is subject to supervision and monitoring
and is no longer as easy as before: for the budget to be efficiently
executed, it must be reasonable, predictable, accurate, and specific.
In many situations, problems of budget execution, including
underexpenditures, arise mainly from deficiencies in budget
compilation, as scholarship has found to be true in many developing
countries (Schiavo-Campo & Tommasi, 1999, chap. 6).
After initiating DBR, China has witnessed a steady improvement
of capacity in budgeting (Ma, 2009a). However, it is a process of
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MA & YU
“learning by doing.” It will take time for managers in both finance
departments and spending departments to understand the
procedural rules of the new system, to collect information about the
operation of departments and especially about various programs
proposed, and to improve their capacity for budget analysis.
In his speech addressing the low efficiency in budget execution,
Zhu Zhigang (2007) sharply criticized the low quality of budgets
compiled and submitted by functional departments, saying that it was
one of the major causes of the accumulation of such a large amount
of unspent monies. According to him, in many situations, it was
difficult for budget reviewers to understand and then review in a
meaningful way many program budgets submitted by departments. It
is apparent that some departments do not have a clear and full
understanding of the operation of programs they proposed, do not
accurately estimate the cost of each program, and may just casually
group several and even many different programs into a same
package only for the purpose of grabbing monies from the MOF.
Budgets compiled as such are inevitably unrealistic, and thus
difficult to implement. This is especially true as their implementation
is now subject to the newly created procedural rules of expenditure
control. The following two cases are illustrative of this point. It was
found that in 2005, the Ministry of Agriculture appropriated ￥669
million of its program budgets to the subunits responsible for
program implementation as late as November. This was simply
because at the stage of budget compilation, the ministry actually
didn’t have specific programs for its budgetary requests (Zhu, 2007).
Ironically, the MOF itself is also beset by low capacity in budgeting. In
2007, it was found that of the ￥ 255.8 million expenditures
budgeted for four MOF programs, only ￥83.7625 million was spent
as expected. As much as 67% was unspent. As revealed by the
annual audit report, this was simply because the MOF’s budget for
these four programs was inaccurate (NAO, 2008).
Subnational governments are no better than the central
government. Respondents from the treasury branches of finance
departments always complained that it wasn’t uncommon that many
programs in departmental budgets were difficult to implement simply
because the budgets tended to be inaccurate, unrealistic, and in
some cases even unacceptable. Under these circumstances, if the
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
105
treasury office responsibly carries out its function of expenditure
control, money cannot be spent.
Low Capacity in Cash Management
Cash management lies at the core of budget execution. To
smoothly execute the approved budget, the finance department must
be able to efficiently manage cash flows and make a good match
between incoming and outgoing cash. At the very least, monies must
be managed to ensure they are available over time to meet approved
and acceptable expenditure needs when agencies decide to carry out
their programs. This requires a realistic and well-planned cash
budget.
Currently, at the beginning of budget execution, all departments
will negotiate with the finance department about their expenditure
plans. However, at all levels, the capacity in cash management is low;
what exists is a form of cash control rather than cash management.
Usually, as many respondents pointed out in our fieldwork, the
finance department tends to impose a much tighter cash control on
fund releases in the first half of the fiscal year, but in the latter half of
the fiscal year, especially the last quarter, loosens its control in order
to spend money before the close of the fiscal year. This therefore
delays budget execution and leads to underexpenditures. Moreover,
the finance department at present lacks the capacity to develop
expenditure plans well to meet the cash needs of different activities
of different departments, which requires a scientific analysis of the
characteristics and regularities of their activities and then cash
outflows.
Consequently, respondents from spending departments
complained that when they need money to carry out a program, they
may not get it from the finance department, and sometimes, when
the money finally arrives, it is already impossible for the department
to carry out the program. For example, the carrying out of certain
infrastructure constructions must avoid the rainy season, which
comprises the whole summer and early autumn in many places in
China. The best season for the department to carry out these projects
is the period from the November of one year to the March of next
year. But, when the date of December 31 arrives, the department can
no longer use its monies. It must wait until May of the next year to
once again start using the funds to finish whatever projects remain
106
MA & YU
unfinished, but by that time, the rainy season is again coming. This
illustrates how inefficient cash management has delayed budget
execution and led to the accumulation of unspent monies.
CONCLUSION AND DISCUSSION
China is not the only country beset with underexpenditures. For
example, as Andrews (2006) points out, in South Africa, the
combination of a control-oriented financial management staff and
cumbersome disbursement controls has caused delays in the
spending of relevant funds (e.g., poverty relief funds) and the
accumulation of significant underexpenditures. But, to a large extent
the blame for China’s current budgetary woes of underexpenditures
should not go to the control system created in the wake of the budget
reform. Instead, we argue that the unexpected phenomenon of
underexpenditure occurs because the budgeting system remains
ineffective at imposing budgetary controls both within and over the
government.
Over the past several years, as the issue has become more and
more salient, governments and legislatures at all levels have started
to adopt measures to improve operational efficiency. Many
governments have begun to ask departments to submit explanations
for delays in budget implementation and have warned that they will
take back spending authority over unspent money. At the central
level, the legislature and the MOF have repeatedly demanded that
quasi-CBAs ensure an earlier allocation and appropriation of funds to
specific spending objectives while obeying the predetermined
percentage of reserve funds. Some local legislatures have tried to
impose ex ante controls over in-year use of overcollected revenues
(Ma, Niu, Yue & Lin, 2008, pp. 176–177). However, these measures
have achieved little, and the problem of underexpenditures remains a
nationwide salient problem.
This should not be a surprising finding, because a thorough
resolution of this problem demands further adjustment of the power
structure between the government and legislature and between
various parts of the government (e.g., between the finance
department and quasi-CBAs). As Willoughby (1918) argued nearly a
century ago, budgetary reform is essentially a kind of political reform
which will reshape the power structure. To solve the problem of
underexpenditures, China must transform the finance department
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
107
into a real CBA, capable of imposing uniform budgetary controls
within the government. This first requires wresting budgeting
authority from the quasi-CBAs. If that can be achieved, the finance
department will gain budget authority over the large amount of funds
currently controlled by these quasi-CBAs, and then those monies will
be subject to the same controls as the funds budgeted for other
program expenditures. The finance department must also be given
greater power and independence so that it is able to enforce
budgetary controls over other departments and resist pressure from
politicians. Finally, its authority over spending departments must be
strengthened so that it is able to take back spending authority related
to unused funds.
Besides this, China also needs to greatly strengthen legislative
controls over the government. The mismatch between the budgetary
and fiscal years should be addressed. If it is accepted that only after
the legislature has passed the budget will the government be able to
spend money, then the fiscal year should start from the date the
legislature has passed the budget and end before the legislature
deliberates on the new budget. Such a change in setting the fiscal
year would give the government three or four more months to execute
the budget. Moreover, China needs to strengthen legislative control
over the government’s discretion as to overcollected revenues. This
requires a revision of the legal definition of budget adjustment and
enforcement of a new rule that every request for supplements or
funds for new programs must be submitted to the legislature for
approval. In this case, it will be difficult for the government to create
and freely spend overcollected revenues in budget execution, which
has been a major source of the accumulation of underexpenditures.
Undoubtedly, both sorts of power restructuring will encounter
much political and bureaucratic resistance. The effort to transform
the finance department into a real CBA will be resisted by the quasiCBAs and other functional departments. Some of the quasi-CBAs,
such as the CNDR, are currently more powerful than the finance
department in China’s political structure. Efforts to strengthen the
power of the legislature will encounter much more political resistance
because currently the Chinese Communist Party is hesitant to move
in that direction.
Another lesson that can be drawn from the Chinese experience is
that the capacity to budget does matter. In the case of China,
108
MA & YU
although at all levels of government the capacity to budget has begun
to develop and is improving, it remains generally low in the areas of
budget compilation and financial management. This also contributes
to the delay in budget execution and the accumulation of unspent
funds. Nevertheless, the low capacity in budgeting has not been
caused by the newly implemented budgetary controls. On the
contrary, it is upon the establishment of these controls that China has
begun to develop the basic capacity to budget, as Ma (2009a) has
argued. To further improve its capacity to budget, China must not
loosen budgetary controls—it must refine them. At China’s current
stage of developing a modern public budgeting system, a welldesigned budgetary control system is a necessity. Without effective
budgetary controls, misuse of public money will remain as prevalent
as it was before budget reform (Ma, 2009b; Ma & Ni, 2008). Under
such circumstances there is no hope for Chinese governments to
develop the capacity to budget. Moreover, to develop the capacity in
budgeting, the finance department, functional departments, and the
legislature require sufficient and reliable information about the
operation of departments and especially programs. Before budget
reform, even functional departments themselves were unable to have
such information because monies and hence activities were
fragmented even within a department (Ma, 2009a; Ma, 2005). It has
only been thanks to the process of installing budgetary controls that
all budgetary participants have become aware of the necessity of
reliable budgetary information and sound budgetary analysis, and
then taken actions to collect and analyze information. Put another
way, at this stage of developing a modern budgeting system in China,
a well-designed system of budgetary controls will help with the
development of a budgeting capacity.
In the era when decentralization is in vogue, it is expected that
the above argument may be unpopular with audiences. However, as
suggested by the Chinese experience, agenda setting for budget
reforms must have a historical sense. A reforming package that well
fits the needs of one country may not be necessarily suitable for the
needs of another country. Budgetary systems in different stages of
development face different problems and hence require different
resolutions. The Chinese experience is illustrative for other
developing and transitional countries either still lacking a proper
budgeting system or struggling to create such a system. To a large
extent, the argument here echoes Schick’s (1998a, 1998b) call to
WHY MONEY CANNOT BE SPENT AS BUDGETED? LESSONS FROM CHINA
109
put budgetary basics first before moving to a more advanced model
of budgeting.
NOTES
1. This research is supported by 985-3 Research Funds of Sun Yat-
sen University.
2. Calculated on data from Li (2006, p. 51), Jin (2007a, 2007b),
and Liu Jiayi (2008).
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